Federal
energy regulators have just released more than 400 pages of documents that
suggest former Enron chairman Ken Lay and former chief executive Jeff
Skilling were aware that Enron's west coast traders may have broken the law
by using manipulative trading tactics in California to boost Enron’s profits
during the height of that state's power crisis.

Moreover, one of Enron's most powerful Washington, D.C. lobbyists, who met
with several members of the Bush administration in the spring of 2001 about
Enron's opposition to price controls on electricity sales in California, was
told by Tim Belden, the mastermind behind Enron's notorious trading scams,
less than a year earlier that Belden and other traders working at the
company's West Coast trading desk in Portland, Oregon spent the better part
of 2000 and 2001 breaking the rules governing California's power market
“when opportunities presented themselves to make money.”

“There's
really two -- two things that happened -- two areas... in terms of things
blowing up,”
Belden told Richard Shapiro, Enron's vice president of regulatory affairs
and one of the company's lobbyists, in August 2000. “One is our day-ahead
scheduling practices and then the other is our real-time operations. Um,
we've been doing and have been doing for two years a lot of activity in, you
know, there's black, there's white and there's gray. Um, we have been
endeavoring into the gray area when opportunities present themselves to make
money. We have now moved out of the gray area into the clearly what's legal
area... not even legal, but what's, um, there's like the letter of the law,
the letter of the rules and the spirit of the rules. Um, we've been
exploiting the letter of the rules -- or literally interpreted --
interpreting the rules, um, in California when we can make money...”

The documents released by FERC -- more than 400 pages of transcripts of
recorded conversations between Enron traders, company attorneys and Enron’s
public and governmental affairs departments that took place at the height of
the California electricity crisis in 2000 and 2001 -- provide the most vivid
portrait to date of the company’s questionable trading practices that set
off California’s power crisis.

California's electricity crisis wreaked havoc on consumers and businesses
from the summer of 2000 to June of 2001, resulting in three days of rolling
blackouts, hundreds of emergency power alerts and forced the state's largest
utility, Pacific Gas & Electric, into bankruptcy. The crisis cost the state
more than $70 billion.

State
Attorney General Bill Lockyer said last week that he expects to file a
multibillion lawsuit against Enron as a result of the company's manipulative
trading practices detailed in the transcripts.

California is also seeking $9 billion in refunds from a handful of energy
companies for overcharging the state during the power crisis. That issue is
expected to be taken up by the 9th Circuit Court of Appeals in San Francisco
because FERC said California was only entitled to roughly $3 billion in
refunds.

In the
conversation between Shapiro and Belden, Shapiro urged Belden to pull back
on his trading schemes in California, such as artificially clogging
transmission lines, sending power out of state and submitting false data to
the state's grid operator, and to begin working more closely within the law
because of the severe political risk associated with Enron and the billions
of dollars the company reaped from California's electricity crisis to fill
its coffers.

But
despite the fact that Shapiro was in the know about Enron’s questionable
trading practices, he continued to lobby powerful Washington lawmakers
urging them not to fix the market problems in California saying the crisis
was the state’s fault for not building enough power plants, according to
public documents from the House Governmental Affairs Committee.

Belden,
however, told Shapiro that he would continue to exploit the rules in
California, believing that he may be breaking the law as a result, as long
as it didn't cause the lights to go out in the state. He added that if
Skilling were forced to testify before a commission about the inner workings
of the West Coast trading desk that it could hurt Belden's career.

“I know
there's a lot of political risk and I know that we got a ton of money in our
book and then -- if Jeff Skilling ah, has to go in front of some commission
and explain the activities of the West Power Group, that's probably not so
great for my career,” Belden told Shapiro, according to the transcripts.

This is
the first revelation that an Enron lobbyist was briefed on the company's
manipulative trading practices and it appears likely that other executives
were also in the know. Shapiro wielded enormous influence with members of
the Bush administration. On May 23, 2001 he met with White House economic
adviser Robert McNally and Energy Secretary Spencer Abraham's chief of staff
about Bush’s National Energy Policy and Enron‘s opposition to price controls
in California.

The
meeting between Shapiro and McNally came at a crucial time for Enron. The
company’s most senior executives recognized that Enron stood to lose
hundreds of millions in profits and its standing on Wall Street if
California lawmakers were successful in getting federal energy regulators to
rewrite the rules in California‘s power market. Judging by the events that
followed, it appears that Bush and Cheney were in Enron’s corner.

Four
days before Shapiro met with McNally and Abraham’s staff, on May 17, 2001,
Vice President Dick Cheney was interviewed by the television news program
Frontline. When asked if companies like Enron were behaving like a
“cartel” and manipulating the California power market Cheney responded with
a resounding “no.”

“The
problem you had in California was caused by a combination of things -- an
unwise regulatory scheme, because they didn't really deregulate. Now they're
trapped from unwise regulatory schemes, plus not having addressed the supply
side of the issue. They've obviously created major problems for themselves .
. .”

That
same day, May 17, 2001, Cheney and Bush unveiled the details of the National
Energy Policy, in which Cheney adopted seven of Ken Lay's suggestions,
according to published reports. Had the intimate details of Enron’s trading
schemes been known to California officials, it most certainly would have
derailed Bush’s energy policy, which called for keeping many of
deregulation’s key components in place, and forcing key players, like
Cheney, to return to the drawing board to draft a new policy.

But
there’s more.

On May
17, 2001, Enron Chairman Ken Lay called a secret meeting at the Peninsula
Hotel in Beverly Hills, California, in an effort to get some of the state’s
rich and famous to lobby the California Legislature about getting
“deregulation right this time.” Lay apparently paid close attention to
Enron's trading profits. A few months earlier, Sue Mara, an Enron
governmental affairs employee phoned Bob Badeer, an Enron trader, with a
question from Ken Lay. Following public comments by Governor Gray Davis
about the state of California's energy crisis, Mara said Lay personally
wanted to know if Davis's comments had affected the price of power in the
forward market. That Lay would be interested in such minute details
contradicts the former chairman's public statements that he had no idea
about the shenanigans taking place inside of Enron.

California’s current Governor, Arnold Schwarzenegger, who unseated Davis in
a contentious recall election last year, attended the meeting at the
Peninsula Hotel with Lay as did former Los Angeles Mayor Richard Riordan and
junk-bond king Michael Milken and other luminaries. Lay handed the attendees
a seven-page document that contained so-called solutions to the state’s
electricity crisis.

Twelve
days after Lay met with Schwarzenegger and Cheney was interviewed by
Frontline, and eight days after Shapiro met with McNally, President Bush
agreed to meet with Gray Davis at the Century Plaza Hotel in West Los
Angeles to listen to Davis’s plea for much-needed price controls on soaring
power prices. Bush refused saying the free-market would eventually correct
the problems.

But it
was already clear within Enron that the company would no longer be able to
earn, in what one Enron governmental affairs employee referred to in the
transcripts as, “bucketloads of cash” from California. Weeks earlier,
California, under Davis, signed $42 billion in long-term electricity
contracts with more than two-dozen energy companies and no longer bought the
bulk of its power needs in the open market, where they earned their biggest
windfall.

In June
2001, shortly after the details of the long-term contracts were revealed,
Skilling and Lay summoned Belden to Houston to discuss the company’s West
Coast trading division, which Belden said in one recorded conversation
accounted for 80 percent of Enron's profits in 2000 and 2001, to determine
if anything could be done to salvage the operation, according to one person
working with the Justice Department on the investigation.

It’s
unclear what came out of that meeting, but two months later Jeff Skilling
resigned from Enron. Just three months earlier, on March 9, 2001, he flew to
Portland to take Belden and other senior traders out to dinner at Higgins
restaurant to celebrate Enron’s successful first quarter earnings. In the
transcripts released by FERC, traders said they made upwards of $10 million
a day in 2000 by utilizing many of the trading scams developed by Belden.

What’s
surprising about those scams Enron traders pulled in California is how
well-known it was within the company’s Houston headquarters, according to
the transcripts. Indeed, one public affairs official at Enron instructed a
trader based in the company’s Portland, Oregon trading division to lie to a
Wall Street Journal reporter who wanted to write a story about
Enron’s lucrative trading desk.

“The
thing is anything they'd ask you, you'd have to lie because you wouldn't
want to tell them the truth," an unidentified Enron employee in the
company’s governmental affairs department said to an Enron trader. The
governmental affairs employee then attempts to talk the trader out of doing
the interview with the Journal. "I wouldn't do it (the interview).
'Cause first of all, you'd have to tell 'em a lot of lies, cause if you told
'em the truth...”

“I'd get
in trouble," the trader says, interrupting the governmental affairs
employee.

"You'd
get in trouble,” the governmental affairs employee said.

Still,
on July 18, 2000, The Wall Street Journal printed a story under the
headline “Energy Traders Reap Big Profits on High Prices,” which explained
the excitement of being an energy trader during a period of volatile energy
prices, apparently the same story that was discussed between the Enron
trader and the governmental affairs employee. It's now known, according to
the transcripts, that skyrocketing power prices discussed in that story were
directly caused by Enron's manipulative tactics, and was not a result of
regulatory restrictions that were left in place in California's wholesale
electricity market.

Perhaps
the most prescient part of the transcript is when John Forney, a senior
Enron trader who worked closely with Belden and was indicted on conspiracy
charges, fears that he may be sent to jail. In a conversation Forney had
with Belden, Forney seems to have misgivings about one scheme he just pulled
that involved California and Canada.

Belden
seems to brush off Forney’s concerns, according to the transcripts, and
Forney says he can’t believe that none of his Enron colleagues seem to be
concerned about the possibility of going to jail as a result of the schemes
he and other traders have pulled.

“I only
want to go to jail once,” Forney says.

“Yeah,”
Belden says. “Once in this country.”

Forney
is expected to appear in federal court in San Francisco in October.

Jason Leopold
is the former Los Angeles bureau chief of Dow Jones Newswires where he spent
two years covering the energy crisis and the Enron bankruptcy. He just
finished writing a book about the crisis, due out in December through Rowman
& Littlefield. (c) 2004 Jason Leopold.